OFFICIALS from the UK’s postal services, Royal Mail, are due to visit the island at the end of the month to discuss how they can improve services to and from the island in tandem with their Cypriot counterparts.

Pavlos Pavlides, deputy director of postal services, said that outgoing mail from the UK to Cyprus falls under the responsibility of the Royal Mail and its own agreements with airline carriers.

The majority of post reaching Cyprus is airmail and though Pavlides conceded that there was an issue with fewer carriers arriving to Cyprus, he added that most mail still arrived on direct rather than indirect flights. 

He was responding to a question by the Cyprus Mail on a report from a 50-year-old businessman who has not received any letters from the UK in six weeks. Though Pavlides could not comment on the particular case because he had not dealt with it, the Cyprus Mail asked him to comment on a claim by a senior postal worker in Nicosia that mail from the UK and Germany was being routed via Greece, Romania and Bulgaria. 

Pavlides said that although the bulk of mail came directly, the Royal Mail also sent mail via Greece and to a much lesser extent via other countries. 

The businessman who did not want to be named said that up until two months ago he would regularly receive letters from the UK, including bank statements, circulars and magazines. He visited a post office this week to enquire about the delays and a person in charge “reluctantly volunteered that there was indeed a problem,” claiming that all mail from the UK and Germany was no longer coming directly, which Pavlides said was not the case.

The businessman was not aware of anyone else knew experiencing delays. Pavlides said the postal services do take up the issue of unreasonable delays with other countries’ services, including the Royal Mail, but cannot force any service to change their policy. Cyprus and UK postal services’ delegates are however meeting to discuss how they can improve their services to the public, he said. 

The Cyprus Mail has regularly received complaints from people waiting for mail, particularly around Christmas time with the Royal Mail and Cyprus’ services sometimes giving contradictory information that cannot be verified because the bulk of the mail is not tracked. 

Some 50 per cent of letter traffic, which tends to be untracked items weighing less than two kilos, hails from the UK followed by Greece from where 10 per cent of letters coming to Cyprus arrive, Pavlides said. The majority of parcels come from Germany (35 per cent), Greece (10 per cent) and only then the UK that trails behind with 4.0 per cent. On average, 200 postal sacks arrive every day, with traffic going up during the busier times of Christmas and Easter when delays are more likely to occur.

A postman sorts through the mail

LEAKED INTERNAL documents of the International Monetary Fund (IMF) reveal the executive board’s concern over “optimistic” and “ambitious” forecasts of a Cyprus recovery under the troika bailout and adjustment programme.  

On May 15, the IMF board approved a €1 billion loan to Cyprus for three years as its part of a €10 billion international bailout. The approval allowed for the immediate disbursement of around €86m.

The significant remainder- €9 billion- will come from the EU, suggesting a new IMF approach to troika bailouts of eurozone countries.

In the days leading up to the decision, the 24 directors of the executive board representing IMF member countries shared their views on the Cyprus bailout in a document recently leaked by the online financial site Stockwatch. 

The preliminary observations mainly respond to the projections and country-specific programme prepared by IMF staff, headed by Cyprus mission chief Delia Velculescu. 

The document provides insight into the views, concerns and self-criticism of the Washington-based international lender on recent devastating developments in Cyprus. 

Directors noted the inadequacy of bilateral supervision and “crisis prevention” that lead to the drastic measures initiated in March. They highlighted that the Cyprus crisis was the eurozone’s “least unexpected” since it lost market access almost two years ago, had an oversized banking sector clearly exposed to a Greek debt haircut and went through “protracted negotiations” for a bailout.  

In a summary prepared by board member Menno Snel and senior adviser Ektoras Kanaris, the two note that the imbalances affecting Cyprus in mid-2011 (long-standing structural imbalances, lax fiscal policies, the banking sector’s large exposure to Greece, and lost access to long-term sovereign debt markets) were reasonably manageable at the time. 

However, the situation changed dramatically after the Mari explosion and the Greek haircut on sovereign debt on October 26, 2011, which overnight cost Cyprus’ two largest banks €4.5 billion (around 25 per cent of GDP). 

“Failing to request assistance at that point, when the island’s lending partners may have been more sympathetic, Cyprus’ fate had taken a path of inevitability.

“The delays in concluding an assistance package, unfavourable statements and rumours in the press regarding deposit haircuts and the consequent fall in confidence led to accelerated and substantial deposit outflows.”

While the Cypriot authorities accept some responsibility for the delays in concluding an agreement, which worsened the situation and magnified the financing needs that would eventually be met by uninsured depositors, “they would have hoped that the negotiations were dealt with (in) a more sensitive and fair manner for the benefit of Cyprus, the euro area, the EU and for the programme in general”, said the authors. 

“Arguably, the most important and extraordinary element of the programme was that the recapitalisation of banks would be almost exclusively generated from the banks’ retail deposits,” said Snel and Kanaris. 

The two called the ‘bail-in’ of depositors an “unconventional financing method” yet necessary alternative. 

However, they note that the extensive bail-in of uninsured depositors in the two systemic banks, Laiki and Bank of Cyprus, which constitute more than 70 per cent of the domestic deposit market, “will have severe implications” and create a high degree of uncertainty in estimating the impact on real GDP. 

While the restoration of a sound and well-capitalised banking system should eventually create better conditions in the economy, “the medium-term recovery of economic activity depends very heavily on the restoration of confidence, and measures and reforms to directly boost medium-term economic growth are rather sparse in the programme”.

Regarding the independent evaluation of Cyprus’ anti-money laundering (AML) measures by Deloitte and Moneyval, Snel and Kanaris said: “The results serve to further evidence that some perceptions abroad were highly exaggerated. At the same time it is acknowledged that there is room to improve and the recommendations made will be taken on board.”

The two also note the change in tack regarding the assessment of banks’ recapitalisation needs and due diligence of Cypriot financial institutions. 

“…unlike previous exercises in peer countries, PIMCO has used a more conservative methodology in arriving to the final numbers, providing an implicit buffer for a worse than expected macroeconomic environment.”

Also, “very conservative assumptions” were used for estimating the recovery amounts on defaulted borrowers including, particularly, the application of a forced sale discount of 25 per cent on the projected declining market value of property collateral.

The Cypriot authorities were roundly commended for moving quickly on resolving and restructuring the island’s two largest banks and, despite accepting the programme with reluctance, being fully committed to implementing it faithfully.

“While difficult for the people of Cyprus, the degree of social cohesion in the face of the adjustment so far has been impressive and commendable,” said Snel and Kanaris.

Concluding, the authors said Cyprus faced “an extremely difficult and challenging path ahead through an extended period of consolidation and repair”. 

They added: “However, after a long and tiring period of uncertainty, there is at last a paved path” which, with the financial support and expertise of Cyprus’s international partners, including commitments by the Russian government to restructure a €2.5bn loan repayment, “will see Cyprus through this difficult time”. 

In their response, directors representing South American countries said the board had a difficult decision to make: “Either the Board approves a programme that has little ownership and even less chances of success, or it runs the risk of exacerbating the crisis in Cyprus which could engulf bystanders as Slovenia or Malta and aggravate the problems in Greece.”  

The same directors had some choice words for the Eurogroup’s controversial decision on March 16 to impose a levy on insured and uninsured depositors in both solvent and insolvent banks, berating IMF staff for its part in the troika’s “unacceptable” decision, that was “fortunately shot-down” by the Cypriot parliament on March 19. 

“It should have never been endorsed by Management, especially before consulting with the Board,” they said. 

Another director said the Cypriot crisis will always be associated with “the unsuccessful attempt to involve in bank resolution and for the first time holders of insured deposits, even in solvent banks”.

If the scheme had gone through, the IMF could have been subject to serious reputational risks, he said, adding: “We should keep in mind that the insurance of bank deposits has been the cornerstone of financial stability and trust in banking since the Great Depression.” 

The second package, involving the resolution and restructuring of the two banks, was a better option as it doesn’t hit insured depositors or solvent banks and reduces the burden on tax-payers. 

“However, direct recapitalisation of insolvent banks by the European Stability Mechanism would have been a far better option, with much higher chances of success. It would have not deprived Cypriot businesses from their working capital and medium-income households from their life-savings. 

Alas, this option was, as staff puts it, ‘not available’ (i.e. not acceptable for Cyprus’ euro-area partners).”

The board also noted that the Cypriot authorities’ measures to resolve the two banks without using taxpayers’ money came before the EU has even agreed on its own EU-level resolution mechanism, proposed in 2012 and still under consideration. 

Directors said it was still unknown how the Cypriot restructuring process will differ from a possible EU resolution mechanism, and voiced concern at Europe’s slow pace of reform in terms of greater fiscal integration and setting up a single supervisory mechanism.  

A number of directors voiced concern about the exemptions in the haircut on the two banks, warning of the “legal consequences of giving unequal treatment to uninsured depositors”. 

They also raised the discrepancy between using depositors’ money for Laiki and Bank of Cyprus, and, in the future, public money for recapitalising other “solvent but under-capitalised” institutions like the cooperative banks. 

They further questioned the solvency of the cooperative sector, given that its non-performing loans (NPL) averaged 38 per cent of total loans at the end of 2012, with NPLs in some cooperatives reaching as high as 80 per cent. 

The Russian board representative questioned why Cyprus’ business model with its over-extended financial sector was deemed “unsustainable and doomed to fail” since other small economies, including in Europe, have comparably sized banking sectors and still operate. 

Cyprus’ downfall was its large exposure to Greece despite the latter being in acute crisis for the last three years, he argued. 

“Questions about the effectiveness of Fund surveillance in this case could be raised. Also, we wonder to what extent the obvious complacency of the Cypriot bankers stemmed from the fact that in 2010-2011 the Fund had been actively supporting an illusion that Greek public debt was sustainable.”

Regarding the restructuring of the Russian loan, he said the details outlined are “nothing more than preliminary assumptions at this stage” since the bilateral negotiations have yet to commence. 

A majority of directors seriously questioned the IMF’s medium-term growth forecasts for Cyprus, given the extent of the fiscal and financial adjustment and lack of clarity as to what Cyprus’ new business model would be.  

Some directors charged IMF staff with an “over-dose of optimism”, given its projected cumulative drop in output of 13 per cent for 2013-14, a return to growth in 2015, and a primary fiscal surplus of 4 per cent of GDP by 2018.  

“This huge fiscal effort would be quite difficult to materialise in any country, but even more in Cyprus that needs to find a new business model in the midst of the deepest crisis it has ever had, in an unfavourable international environment and while its eurozone partners are themselves striving for more fiscal adjustment. 

“Every programme needs a pinch of optimism but in this one the required dose of good-will – or suspension of disbelief, if you will –goes way beyond the average,” they said. 

Another director said: “Even with consistent programme implementation, Cyprus faces a difficult economic path. In particular, the drivers of growth on the island will need to shift dramatically.” 

A number of board members questioned what Cyprus’ future growth model will be exactly, and which sectors will lead the recovery, given the beating taken by the financial sector and burst property bubble. 

One director said the potential offshore gas exploitation, which IMF staff did not include in its forecasts, was the only source of growth he could see Cyprus relying on. 

Board members agreed with staff that, down the line, the Cypriot government will have to focus on public expenditure rather than revenue, with further cuts in the public sector payroll and social benefits expected. 

The British representative said the projected fiscal adjustment was “ambitious” and highlighted the need for structural reforms to underpin the consolidation effort in the medium-term. 

“Nonetheless, given the uncertainty surrounding the programme, we note the possibility that headline fiscal targets might prove difficult to achieve for reasons beyond the control of the (Cypriot) authorities,” he added. 

The board welcomed the inclusion of a significant 10 per cent buffer in staff’s debt sustainability analysis “to provide financial flexibility in the event the recession is deeper than anticipated”. 

The preliminary observations mainly respond to the projections prepared by IMF staff, headed by Cyprus mission chief Delia Velculescu

THE new Bank of Cyprus (BoC) must shed at least 20 per cent of its staff to survive, the leader of the bank employee union ETYK said yesterday, also suggesting that certain interests were behind delays in appointing a CEO to the stricken lender.

“To have hopes of survival, the new BoC must go ahead with a substantive reduction in personnel of – at least according to our estimates – 20 per cent initially,” Loizos Hadjicostis told the union conference.

The union chief said other measures would also be necessary as he voiced the workers’ readiness to accept pay cuts.

ETYK had asked for a voluntary retirement plan but the absence of a CEO made it impossible to proceed, Hadjicostis said.

“It appears that the Pope in Rome was elected with greater ease.” Hadjicostis said, adding that the interests there were not so deep or multidimensional.

The lack of leadership is weakening the bank and leading it to catastrophe, he said.

BoC is currently being run by an administrator who is overseeing the enforcement of a Eurogroup decision to resolve Laiki Bank, and transfer certain assets to Cyprus’ biggest lender.

The decision also included taking a chunk of uninsured deposits at BoC and using them to recapitalise the lender as per Eurogroup decision.

Depositors who lost money will receive equity in return.

After the procedure was completed, the new shareholders will vote to elect a leadership to replace the interim board currently in place.

Efforts to find a new CEO have failed so far. 

A prime candidate withdrew his interest this week over the duration of the contract, which could not be longer than September – the period expected to complete the forced cash for equity swap.

Reports however, did suggest that the candidate had been forced to withdraw by Central Bank Governor Panicos Demetriades who allegedly favoured the runner up.

WE MAY be a small and inconsequential country but this has never stopped us thinking big. Not even our newly-found poverty has affected our delusions of grandeur and ambitions to become a regional mover and shaker, a flyweight that fights in the heavyweight division.

Our ambitions were given a big boost last Wednesday when the President of the European Commission Jose Manuel Barroso presented his proposal for a sub-sea, gas pipeline, which he described as the southern corridor, running from the Levantine Basin, in which the island at the crossroads of three continents is based, to Greece and from there to the rest of Europe.

He even spoke about Kyproulla becoming an energy hub and presented a map with a thick grey line showing the path of the proposed pipeline, triggering multiple orgasms in the political/journalistic fraternity. These were more intense than those caused by the return of the Cyprob to our lives a week earlier. 

“Cyprus is now on the energy map,” declared the government spokesman triumphantly, the following day, while an ecstatic House president Yiannakis Omirou declared on Friday that thanks to Kyproulla, all the EU’s gas needs would be covered. We would enable the EU to be self-sufficient, he proudly concluded.

WE ARE on our way to becoming a “world energy power”, as a Phil correspondent christened Kyproulla last week. Bash-patriotic guests on the Lazarus patriotic radio show, on Thursday morning, were in buoyant mood, but more restrained, talking about the Levantine basin energy alliance of Greece, Cyprus and Israel as a “regional power”.

The corridor would be a “powerful strategic tool”, concluded the geo-strategic brains behind our latest plans to become a regional mover and shaker, Yiannos Charalambides who was convinced that the alliance would put the Turks in corner. 

The only guest who tried to instil some rationality into the debate, by insisting that first we should establish what quantities of natural gas there were under our sea-bed before using it as a “strategic tool”, was given short shrift by the presenter, presumably because his negativity was ruining the upbeat mood of the show.

Another factor, that could have destroyed the mood and the guests’ geo-strategic plans for regional domination, was that nobody asked Israel whether it wanted to participate in the Levantine basin Alliance.  

WE WERE also rather disappointed by the lack of enthusiasm shown by Yiorkos Lillikas, a man who also subscribes to the theory that Kyproulla should be a major power. Yiorkos issued an announcement saying that the pipeline to Greece did not serve our geo-strategic and national interests. 

Only a liquefaction plant would allow us to exploit the Asian markets, said geo-strategic George, who must not want to help the horrible Europeans become self-sufficient, after they destroyed our economy. He also feared that if we cornered the European market, Gazprom would lose out and we would no longer be able to rely on Russia to change words or phrases in UN Security Council resolutions about the Cyprob.

This is another strong reason for targeting the Asian markets. We must be able to think about these things when we become a world energy power, at least until we become a permanent member of the UN Security Council and no longer need Moscow’s help.

THE CYPROB comeback, celebrated in all last Sunday’s papers, faded as the week progressed in spite of its salesmen’s efforts to keep it on the news market. Passionate calls for Big Bad Al’s immediate replacement, repeated for the last four years, have become too routine and boring to capture people’s imagination.

There were valiant attempts to make something out of the UN chief’s eagerly-awaited reaction to President Nik’s indignant letter, bad-mouthing Al, but New York refused to play ball, avoiding a public response. As Ban Ki-Moon was away, the director of his office, Susana Malcorra, on Thursday, gave “appropriate assurances” to our UN perm rep that the May 30 dinner would be a “social event” as Nik had agreed and expected.

When a statement was eventually released about the dinner by the UN on Friday, our government was unhappy with it and insisted that the wording had to be changed; a compromise was reached in the early hours of yesterday, but as much as we love our problem, we will not bore you with any more information.

TO ENSURE, no politics is slipped into the dinner by the devious Downer, it was reported that no translators would be attending the bi-communal feast. This would guarantee that the dinner conversation would not get too lively as Eroglu’s English is as good as Nik’s Turkish.

The big question is what if Eroglu, in his broken English tells Nik that he would like to discuss the return of Famagusta to Greek Cypriot as a confidence-building measure. Would Nik and his missus storm out because this would be a violation of the social character of the dinner, or would he diplomatically change the subject, asking Eroglu how many grandkids he has?

Meanwhile the UN chef has been in continuous consultations with Al’s political advisors over the menu for the social dinner. The UN does not want to serve any food that could be seen as politicising the dinner, so political vegetables like potatoes, broccoli, carrots, kolokasi and kouloumbra are off the menu.

THE EUROCOCK minister of agriculture Yiannis Kouyialis may have been in charge for only three months, but in that short time he has drastically improved the ministry’s effectiveness in dealing with the clandestine importation of Turkish fish.

In the first four months of this year 32 cases have been brought against individuals selling fish of Turkish nationality. In four months, we are just one case short of equalling last year’s total. This is a direct result of Kouyialis’ orders for stricter checks. The minister is now planning for inspectors to work on a shift system (as long as Hadjiklamouris permits it) so there could be even more checks.

By the end of the year, our bash-patriotic minister will ensure the threat from Turkish fish is completely eliminated and thieving fish restaurants would resume charging prices for fresh fish that 95 per cent of the population can’t afford. We can always rely on a Eurocock to defend our national interests.

THE ALLEGEDLY well-run co-op banks, which were model credit institutions, according to our politicians and the Governor of the Central Bank Professor Panicos, will cost us about €1 billion to re-capitalise. 

I can still remember how last summer, when the Professor was performing the role of the AKEL Central Committee’s puppet, how he was publicly praising the healthy fundamentals of the co-op banks and assuring us that they were very well-regulated, compared to the banks. For the commies and Panicos, banks were synonymous with bad and co-ops with good. 

At the time, the Governor supported the Akelite dogma, which was violently opposed to bringing the co-ops under the supervisory authority of the Central Bank because it might limit the loans-as-rusfeti policies of the commies who controlled most of the co-ops. 

Now the Co-op Central Bank, which performed its supervisory duties so well, is looking for €1 billion to cover the co-ops’ capital needs. It has decided to cover the shortfall by a share issue that is guaranteed to flop. ‘A’ and ‘B’ shares would be put on sale. ‘A’ shares would be offered to co-op members with no money and ‘B’ shares to members of the public with no brains. 

When the share issue flops, the state would buy all the B shares with the troika money that was set aside for the co-ops, despite Panicos’ assurances about their financial health.

FORMER commerce minister Antonis Michaelides has been offered the poisoned chalice of the chairmanship of Cyprus Airways by the government, but is playing hard to get. Press reports suggest that he would be meeting the ministerial committee dealing with the airline and subsequently president Nik, before he gives an answer.

Michaelides, who has experience of running a big company in serious financial trouble – unsuccessfully - does not seem very confident of rescuing the national carrier, which is why he has set one condition for accepting the government’s offer – the guarantee of financial support to the airline by the state.

If the government planned on offering financial support it could have appointed any Party loser chairman and would not have been seeking the business expertise of Michaelides.

EVERYTHING to do with the once mighty B of C seems to degenerate into farce. Efforts to hire a new CEO to steady the bank stalled, after the successful candidate, a Cypriot bank executive working in Greece – Michalis Kolakides – failed to agree terms.

Kolakides had been negotiating the details of what he thought would be a two-year contract, only to be informed on Thursday that the bank could only offer a four-month contract. The B of C did not want to commit to a longer contract because by the end of September, the new shareholders (the Russian businessmen whose deposits were bailed in) of the bank would choose a new board of directors (the Cypriot lawyers representing the new Russian shareholders) which would choose a new CEO.

If the members of the interim board of the B of C believed that any banker, worth his salt, would give up a well-paid job, for a four-month contract at a struggling bank with an uncertain future, they are not just unfit to be directors, they are unsuitable to run a periptero. One of them could run Cyprus Airways, if the state offered financial support.

BASH-PATRIOTIC Professor at the Nicosia University, Andreas Theophanous, on Tuesday, presented a study in which he argued that Kyproulla had no choice but to leave the euro, because otherwise “we are heading for collapse”.   

Theophanous proposed that we leave the euro temporarily, after securing the approval of our EU partners, whom it would be easy to convince that they stood to gain from such a move. We would return to the eurozone after we and the eurozone solved our structural problems, opined the populist professor.

The details of his proposal were especially interesting. Bank deposits would remain in euros, while loans would be converted to Cyprus pounds. Businesses would have the option to pay in euros – even salaries – and an incomes policy would be introduced.

I have to admit this is the most brilliant idea Theophanous has come up with, during his impressive academic career. A nomination for the Nobel Prize for Economics, I believe, is nothing more than such original thinking deserves.

Some fish have their very own nationalities

THE RETURN of the Cyprus problem to the news 10 days ago lifted the gloom of the politicians, broadcasters and newspaper commentators, who, for the previous two months, had to talk and write about the unrelenting barrage of negative developments that hit the country. In these two months, their powerlessness and the hollowness of their public pronouncements were exposed for all to see. Brave and serious-sounding words meant nothing as the Eurogroup set in motion the demolition of our economy with nobody in Cyprus able to limit it, let alone stop it.

The national problem, in contrast, has always allowed a much more extravagant discourse, marked by defiant rhetoric, big words and uncompromising posturing. This is why our leaders and opinion formers seized the opportunity to make big issues out of the previous week’s revelations about the existence of the 77-page UN document, recording convergences and divergences during talks and President Anastasiades’ letter to the UN Secretary General. They all started playing their favourite role again as brave defenders of our national interests, determined to resist the foreign attempts to impose an unfair deal.

Last Sunday’s newspapers were full of articles about Anglo-American attempts to ‘force a speedy closure of the Cyprus problem,’ as well as calls for the replacement of the UN Special Representative Alexander Downer. Political parties were also calling for Downer’s immediate replacement, as they had been doing every so often in the previous three or four years. The consensus was that the Anglo-Americans were working on an ‘express solution,’ now that they felt the collapse of the economy had put the Greek Cypriots in a very weak position, because the US also wanted to tackle the issues of energy in the eastern Mediterranean.

Inevitably, the hydrocarbon deposits in the Cyprus EEZ are now being linked to the Cyprus problem, even though the Anastasiades government has been arguing that the two issues should not be linked, as if this were a realistic possibility. With Turkey regularly issuing threats and warning that it would use force to stop Cyprus extracting natural gas from its EEZ, is there the slightest possibility that the two issues would not be linked? In fact, the UN is pushing for a resumption of the peace talks because a settlement would create the stability necessary for the exploitation of the area’s hydrocarbons. 

NATO chief, Anders Fogh Rasmussen was stating the obvious a few weeks ago when he said that the exploitation of the natural gas would have to wait for a settlement, but all Cypriot politicians dismissed his view as ‘unacceptable’ because it ignored our sovereign rights. The possible existence of large quantities of natural gas in our EEZ has, regrettably, made us have ideas out of step with our size. The nationalist hard-liners are now boasting that Cyprus could become a major player in regional politics. One columnist wrote last week that the east Mediterranean would a ‘world energy power’.

The Barroso proposal, presented on Wednesday in Brussels, for a gas pipeline from the eastern Mediterranean to Greece and from there to Europe, had commentators talking about the creation of a ‘regional power,’ comprising of Greece, Cyprus and Israel, the implication being that Turkey would not dare mess with it. Had anyone asked Israel if it wanted to be part of this alliance? As for the idea of an underwater pipeline to Greece, it had been repeatedly dismissed as impractical and too costly by experts, a factor that did not enter the analysis.

Will our Cyprus problem warriors ever realise that we are a tiny country incapable of playing regional power games. It would be our biggest mistake yet, if we thought we could use the discovery of hydrocarbons to reject a settlement again, under the illusion that we could become a major energy player, something that will never happen. If we are ever to benefit financially from the hydrocarbons in our EEZ, we need to recognise that the first requirement is regional stability that could only be achieved through some form of co-operation with all our neighbours.

We need to have a sense of perspective and consider how badly our politicians fared the last time they had to handle a serious matter such as the bailout, which involved dealing with powerful countries. We do not want to be put in a similar position – being faced with an ultimatum we cannot turn down - because we think Cyprus could become a ‘regional energy player’ and not have to worry about a settlement. 

THE BANK of Cyprus (BoC) is urging people to be vigilant when it comes to checking bank statements after it was discovered that due to a systems error, a number of customers, including a babies and toddlers group, had been wrongly subjected to a haircut on their deposits.

According to a BoC spokesman, the bank is aware that mistakes have been made and are attempting to fix them.

“Certain companies were listed wrongly within our system and when the order was given to cut deposits they were unfortunately included,” he said. “We are aware of the problem and we are working to rectify it,” he added.

The spokesman said that if a customer notices their account has been erroneously debited then they should contact their local branch manager who should be able to fix the problem.

“Our customers should feel at ease that mistakes can be rectified, as long as they are actual mistakes,” he concluded.

Currently, 60 per cent of the uninsured part of BoC deposits - the 37.5 per cent already subjected to a haircut, plus another 22.5 per cent - is susceptible to a conversion into equity. The remaining 40 per cent of uninsured BoC deposits is for the time being not subject to such conversion but 30 per cent of it remains frozen.

Mother of two, 36-year-old, Angie Eliades who runs St. Paul’s Babies and Toddlers playgroup was shocked when she was informed that the group’s account, which contained a grand total of €960 had been given a haircut.

“I handed over a cheque of €252 at the end of April to pay for rent and was told on Monday that it had bounced,” she said. Eliades visited her BoC branch to find out why the cheque had bounced even though there should have been sufficient funds in the account.

“The assistant manger, whose English wasn’t great, told me that we were liable to receive a haircut and that there was nothing we could do about it as it was happening across the island,” she said.

Eliades explained that the group charges €4 per every two-hour session so they can cover rent, food and drinks for the children, new toys and a cleaner. “The group is run by volunteer mums who dedicate their time to keep the playgroup running,” she added. The group which has been running for more than 20 years is open to everyone but would have been forced to close its doors if the bank’s mistake had not been rectified. 

“I decided that I would send my Cypriot husband to the bank to try and clarify the situation or at least receive the details in writing to find out why and how much they had taken as we were under the impression that only accounts over €100,000 were going to be cut,” Eliades said. 

“He went down and was told they had discovered the mistake and the money was thankfully going be returned,” she added.

The event served as a lesson to Eliades who told the Mail that she hoped people would be more aware in the future and demand their rights.

“I hope people take note and realise they need to be more aware to put up a fight because if I had walked away we could have lost our money,” she concluded.

Eliades’ BoC branch manager confirmed to the Sunday Mail that the babies and toddlers group had wrongly been given a haircut and that the money was due to be returned.

“They were wrongly listed as a pension fund in our system, instead of a charity and that is why they were given a haircut but we are fully aware of the case and the money which was taken will be returned,” he said. 

He explained that under the current regulations certain provident, insurance, investment and pension funds are not protected under the insured deposits guarantee of €100,000 and under.

“The bank is aware that a problem exists within the system and is working to fix it and return any money which was taken erroneously,” the manager said.

“The public can rest assured that we are continuing to run checks on where money was taken from and if it is discovered that a cut was performed mistakenly on any account then the mistake will be rectified,” he concluded.

Customers are being urged to keep a close eye on their statements

A seven-year-old girl from Russia is thought to have drowned yesterday afternoon in a hotel swimming pool in Protaras.

Police said the girl had been playing with other children when at some point she was found floating in the pool.

She was immediately pulled out of the water but efforts to resuscitate her were to no avail.  

The girl was rushed to Paralimini hospital where she was pronounced dead on arrival.

Her mother was at the pool with a friend, reports said. They had arrived in Cyprus for holidays on Friday.

Reports said there were signs around the swimming pool warning there was no lifeguard on duty.

A post mortem is scheduled for today.

ALL six defendants in the 2011 Mari naval base blast trial displayed varying degrees of neglect, prosecutors said yesterday, as they urged the court to hand down a guilty verdict for the death of 13 firemen and sailors.
State prosecutor Polina Efthivoulou suggested the defendants’ culpability rested either in their omission to prevent the July 11 explosion despite knowing or that they ought to have known that it was a possibility, or in neglecting to inform of the possibility or for failing to order the evacuation of personnel.
Former ministers of defence and foreign affairs Costas Papacostas and Marcos Kyprianou have been charged with manslaughter and causing death through a negligent act for their involvement in the events leading up to the munitions explosion at the Evangelos Florakis naval base, which killed seven sailors and six firemen.
Former National Guard deputy commander Savvas Argyrou, fire service chief Andreas Nicolaou, deputy chief Charalambos Charalambous, and Andreas Loizides, the commander of the disaster response squad EMAK also face the same charges.
The munitions had been seized from the Monchegorsk, a Syria-bound Cyprus-flagged ship that sailed from Iran.
They were confiscated in February 2009 after it was determined they were in breach of United Nations Security Council resolutions on Iran.
They had been stored in 98 containers that were left exposed to the elements until the day they exploded, also crippling the island’s biggest power station, which was right next door.
A public inquiry into the blast held President Demetris Christofias chiefly responsible while Kyprianou and Papacostas were blamed.
The inquiry was only tasked with identifying potential political responsibility and its findings were non-binding.
Despite the intense pressure, Christofias refused to resign and rejected the findings as unsubstantiated. He accused the investigator, lawyer Polys Polyviou, of exceeding his mandate.

The Vasilikos power plant was damaged by the Mari blast

PRESIDENT NICOS Anastasiades will not start peace talks from where the two sides left off in 2012, he said yesterday after meeting UN Special Advisor Alexander Downer at the Presidential Palace.
The meeting was meant to be part of UN preparations for a dinner scheduled tomorrow between Anastasiades and Turkish Cypriot leader Dervis Eroglu.
However, both the dinner and Downer have been the target of criticism in recent days by the Greek Cypriot political leadership and most of the press. Yesterday’s meeting also turned sour, at least post-facto, when Downer was asked by reporters about a UN document containing convergences achieved in the peace talks between 2008 and 2012.
Responding to a question, the Australian said he handed the document over to both leaders on request last month, which is at least two weeks before the date Anastasiades initially said he had received the document.
The president promptly issued a “clarification” statement following Downer’s comments made outside the Presidential Palace, confirming that the document was delivered to his diplomatic office on April 30.
However, Anastasiades argued he was not notified of the document until May 16, following statements made by AKEL leader Andros Kyprianou regarding its existence.
He put the failure to brief him “exclusively” down to his “workload and to the fact that my diplomatic office considered it simply a reference document and therefore non-urgent in terms of substance.”
“I do not assign responsibility to any of my associates because I consider that they rightly judged it not to be a document of substance, since it referred to actions during the period 2008-2012,” said Anastasiades.
The president also said that he clarified to Downer in no uncertain terms that “any new round of talks will not begin from the point they ended in 2012.”
“Additionally, I clarified that any proposals tabled by the Greek Cypriot side but rejected by the majority of political forces and people in no way bind me and are discarded,” he said.
In his pre-election campaign, Anastasiades pledged he would handle any peace talks on the Cyprus problem in cooperation with the National Council, and he would appoint a negotiator to represent him in the talks.
The president confirmed as much yesterday, noting that the National Council will meet on June 15 where he will present comprehensive proposals for a new upgraded Council, the appointment of a negotiator, working groups and experts, the preparation of a comprehensive framework of proposals, and the new procedure which must be agreed before the start of new talks.
Responding to criticism by AKEL spokesman Giorgos Loucaides that the president had been caught telling fibs, government spokesman Christos Stylianides said there was no point adding any further comment to what the president had already said: “Besides, the president had no reason whatsoever to conceal from the political leadership a document containing a historical account of the period under former president Mr Demetris Christofias.”
Regarding tomorrow’s much maligned dinner to be hosted at the residence of UN Special Representative Lisa Buttenheim in the buffer zone, Downer told reporters the two leaders, himself and Buttenheim would be joined by their spouses, along with an interpreter for Eroglu “because he can speak some English, but he doesn't speak a great deal of English”.
The dinner will be the first meeting between the two community leaders since Anastasiades’ election. It was originally proposed by Eroglu for April but the UN decided it would probably work better if they hosted it.
Anastasiades had threatened not to turn up unless UN Secretary-General Ban Ki-moon could provide assurances that the dinner would not turn political, arguing that he did not want to enter into substance on the peace talks until economic conditions stabilise, following the Eurogroup’s devastating decision to ‘bail-in’ the island’s two biggest banks using depositor’s money.
He never got Ban’s personal assurance on the matter, but the UN chief’s director of office did speak with the Cypriot diplomat in New York in a manner that appeared to provide some form of satisfaction to Anastasiades. 
Asked yesterday if the dinner marks the beginning of peace talks, Downer said “that’s not the intention”.
He added: “The main thing is to get the preparatory work done and done properly”, adding “the two sides obviously have to do that”.
Downer said the UN has not set a date for the resumption of the talks, noting that Anastasiades thinks the preparatory work could be completed sometime between September and October.
Asked to comment on a letter sent by Anastasiades to Ban where the president bemoaned Downer’s alleged efforts to politicise tomorrow’s dinner, Downer said he did not write the letter so he can't make any comments.

Downer meeting Anastasiades at the presidential palace yesterday

THE Shacolas Group, one of the largest employers in Cyprus, said yesterday the ongoing financial squeeze and the ‘haircut’ on bank deposits have taken their toll on its operations.
The group released the first-quarter financial results of two companies that are members of the conglomerate: Ermes – the leading retailer on the island – and Woolworth.
Ermes posted losses of €5m in Q1 this year, compared to losses of €4.4m for the corresponding quarter of 2012.
Turnover took a hit of 15.2 per cent, dropping to €39.4m from €46.5m. Net profits and other revenues fell from €15.1m to €12.5m, a decrease of 17.4 per cent.
The company said it has initiated talks with staff with a view to preserving as many jobs as possible.
Woolworth meanwhile posted Q1 profits of €86,000, compared to €805,000 in the last quarter of 2012. And operating profit dropped to €3.7m from €4.5m. Revenues from concessions and other earnings fell to €4.7m from €5.3m.

The Ermes group has taken a hit

GREEK banker Christos Sorotos has been appointed interim Chief Executive Officer at Bank of Cyprus, the island’s biggest lender currently under temporary control by the Central Bank (CBC) as part of Cyprus’ bailout.
Sorotos, now based in the UK and with experience in corporate restructurings, takes up his duties today, the CBC said. He had previously worked as a deputy governor at National Bank of Greece, country corporate officer for Citibank in Greece and general manager at Eurobank Greece.
Bank of Cyprus was in March placed in administration, as losses were imposed on uninsured bank deposits exceeding €100,000 to recapitalise the lender, heavily exposed to a Greek government debt write-down.
Depositors were forced to take losses to recapitalise the bank as a condition for Cyprus to receive €10 billion in aid from the International Monetary Fund and the EU.
Some 37.5 per cent of deposits not covered by the deposit guarantee scheme have already been converted into equity.
An additional 22.5 per cent is being held as a buffer for potential conversion depending on the outcome of an independent asset valuation due by July.
Normal operation of the CBC board has also been restored after the government appointed three new members – economists Alexander Michaelides, Michael Spanos and Stelios Kiliaris.
The CBC can now go ahead with the selection of the firm that will carry out the asset valuation.

A restructuring expert has been named as CEO of the Bank of Cyprus

A LEADING accountant yesterday called on financial authorities to lift restrictions lest foreign investors and companies run out of patience and decide to take their business elsewhere.
The plea came just as the finance ministry and Central Bank were working on a new decree further easing customer transactions with financial institutions. The decree (the 14th) is set to be issued this Friday.
The new relaxations in capital controls are geared at freeing up commerce, a central bank spokeswoman said, but did not give details.
It’s understood that one of the easements may involve allowing persons to open an account with any financial institution in Cyprus – something that has been prohibited since capital controls were enforced back in March.
Another would allow persons to terminate fixed-term deposits before they mature, for the purpose of making a downpayment or purchasing real estate. This has been a demand raised by developers in particular.
Under the latest decree issued last Friday – and effective for one week – non-cash payments or money transfers from €10,000 to €15,000 per month per natural person in each credit institution are permitted, regardless of the purpose; and €50,000 to €75,000 per month per legal person in each credit institution regardless of the purpose.
Money transfers out of the country up to €5,000 monthly for any purpose are allowed. And the amount of cash someone can carry on their person per trip abroad is €3,000 (or the equivalent in another currency). ATM withdrawals are limited to €300 per day.
The list of foreign banks exempt from restrictions has risen to 14. They are: Arab Jordan Investment Bank SA, Bank of Beirut SAL, Banque BEMO SAL, Banque SBA, Barclays Bank PLC, BBAC SAL, BLOM Bank SAL, Byblos Bank SAL, Credit Libanais SAL, Jordan Ahli Bank plc, Lebanon and Gulf Bank SAL, OJSC Promsvyazbank, Privatbank Commercial Bank, and Russian Commercial Bank (Cyprus) Ltd.
In exchange for €10 billion in bailout funds from the EU, Cyprus was forced to agree to resolve its second-largest lender, Laiki, and recapitalise Bank of Cyprus (BoC) using a large chunk of deposits over €100,000.
In return, depositors will receive equity at the new BoC, which will also absorb certain assets that belonged to Laiki.
Depositors have thus far lost 37.5 per cent of their money in BoC with a further 22.5 per cent frozen by the Central Bank to be used if necessary.
Fearing massive outflows of capital, the Central Bank released only 10 per cent from the remaining 40 per cent.
Foreigners doing business in Cyprus and holding accounts with banks here were spared neither the ‘haircut’ nor the subsequent restrictions.
Yet despite their losses, foreign companies are willing to give Cyprus a second chance, said Kyriacos Iordanou, general manager of the Institute of Certified Public Accountants (ICPA).
“It seems the foreigners have come to terms with having lost a part of their money… but what they will not stand to lose is their business,” cautioned Iordanou.
“So they are giving us a second chance, which we should not waste,” he added, alluding to the need to lift capital restrictions as soon as possible.
In the immediate aftermath of the haircut decision, the accountant said, many foreign businesses were thinking about closing up shop here and relocating.
Since then, he added, some have reconsidered.
“We have definitely lost some companies,” Iordanou added, without going into specifics.

Customers will be able to open bank accounts

THE GENERAL impression given by the weekend speech of Loizos Hadjicostis, the leader of the bank employees union ETYK, was that he is running the Bank of Cyprus. Not only did he tell his members that the bank’s work force would be reduced by 20 per cent, at least initially, but also that the redundancy scheme would be voluntary. He did not explain what would happen if inadequate numbers were willing to take up the offer of early retirement.
The retirement scheme could not be implemented as long as the bank did not have a CEO, he concluded, warning that the lack of leadership was weakening the bank and pushing it towards catastrophe. His worries are over now, as a new CEO has been appointed.
However, the union boss neglected to mention how his union’s meddling also made the bank’s restructuring more complicated. By persuading the Central Bank to transfer the entire Laiki Bank workforce to the Bank of Cyprus, an unheard of practice when a company has gone bankrupt and its operations taken over, he is not contributing to the quick restructuring that would avert the catastrophe he fears.
But as Hadjicostis is a union boss working for the ‘interests’ of his members nobody questioned this irrational decision, which has almost doubled the employees of the Bank of Cyprus for the last two months, at a time when cost-cutting should have been the priority. It also created the absurd situation in which the employees of a bankrupt bank have the opportunity to take the jobs of the workers of the healthy bank. And the ETYK boss has been putting pressure on the management of the Bank of Cyprus not to discriminate against Laiki’s employees by protecting its own.
In effect, Hadjicostis is trying to dictate to the bank how re-organisation and restructuring would take place. He has demanded the option of voluntary retirement being extended to all the bank’s employees. He has also decreed that bank employees would be paid the full provident fund they would have been entitled to before the haircut, regardless of the fact that this would cost the Bank of Cyprus an additional €91m it cannot afford.
It is time this arrogant union boss, who acted as the most enthusiastic cheerleader of the man who bankrupted Laiki, Andreas Vgenopoulos, was put in his place. He cannot still be allowed to call the shots because his union’s interests are not the same as the bank’s, which he supposedly wants to save. To survive, the Bank of Cyprus might need to get rid of 40 per cent of its workforce, the majority of which would have to be bankrupt Laiki employees, and impose pay cuts (Hadjicostis does not oppose this). It has no obligation to offer voluntary redundancy to all staff and no legal obligation to pay out €91m to cover the losses of the ETYK provident fund.
This is what needs to be made clear to ETYK by the Bank of Cyprus board and the new CEO. It must understand the days when it was calling the shots are over for good.

THE SALE of Cypriot banks’ Greek operations to Greece’s Piraeus Bank was a political decision, the Central Bank chief said yesterday.
Both the price and the terms of the sale were hammered out and agreed at a political level between the governments of Cyprus and Greece during the two Eurogroups of March, Panicos Demetriades told the House Ethics Committee.
The Central Bank of Cyprus (CBC) was merely enforcing that political decision, he added.
The operations of all three Cypriot banks – Bank of Cyprus (BoC), Laiki and Hellenic – went to Greece’s Piraeus Bank, which paid around €500m. The sale was a precondition for Cyprus’ €10b bailout, designed to help the island deleverage its vast banking sector, a key demand from the eurozone and the IMF.
It was intended to lower the leverage ratio of Cyprus' banking system (assets/GDP) to around 6.8 from about 8.
The sale also helped shield Cyprus from potential negative developments in Greece and vice versa.
The deal had been finalised after the Eurogroup decision in March to resolve Laiki and recapitalise BoC by taking part of the uninsured – over €100,000 – deposits in a process that came to be known as a bail-in or haircut.
Deposits in the Greek branches were left untouched.
Negotiations between the CBC and Piraeus regarding the deal were held between March 23 and 26.
But, Demetriades said, the talks dealt not with the sales price or terms – which had already been agreed – but rather peripheral issues and to the drafting of the sale contract.
One issue that came up during these talks, Demetriades said, was which party would incur taxes from the transaction. It was decided that any taxes would burden the buyer.
Piraeus’ lawyers had also sought to include a get-out clause from the sales contract, a demand refused by the Cypriot side.
At any rate, Demetriades said, both these issues were referred to and ultimately resolved by the finance ministers of the two governments – Michalis Sarris and Greece’s Yiannis Stournaras.
The CBC boss sought to rationalise why Cypriot banks’ Greek branches were spared a bail-in of depositors – a move which also served to fire-wall Greece’s fragile banking sector.
Given that a decision to bail in uninsured depositors had already been made, the central banker said, it would have been impossible for the branches in Greece to re-open for business.
“As we would not have been able to impose capital restrictions there [Greek operations], this would have caused mass withdrawals of deposits and led to the collapse of the banks and the activation of the Deposit Protection Fund,” he noted.
A bank failure would mean the state must guarantee all insured deposits. But given that total insured deposits in the Greek branches amounted to €9bn, there was no way the state could come up with that cash.
Demetriades sought to downplay criticism here that the deal was lopsided in Greece’s favour.
Earlier this month, Piraeus reported a net profit of €3.62bn compared with €46 million in the same period a year earlier. The figure included €3.41bn goodwill write-back from the Cypriot takeover and a deferred tax asset of €540m.
Excluding the one-off gain, Piraeus said it lost €336 million before taxes.
But the central banker said these were accounting, or unrealised profits, and predicted that Piraeus’ numbers would gradually be offset by an increase in the bank’s non-performing loans.
Shortly after the deal, Piraeus said its ratio of non-performing loans would rise to 26 per cent from 21 per cent after the branch takeover.
The deal made Piraeus Greece's second-largest bank with combined assets of €95bn, overtaking Alpha Bank.

Piraeus Bank in Greece took over the Greek branches of Cyprus' three banks

A pipe bomb exploded this morning at the offices of the Kissonerga community council causing damage to the building and shattering the windows of a neighbouring tavern, police said.

The low explosive improvised device went off just after 2am. It had been placed in the front of the building, located at Kissonerga’s main square on Christos Kellis Avenue.

Members of the council said they could not imagine who could carry out the bombing as they had no problems with any of the community’s residents.

Police are still seeking a 40-year-old Kurd in connection with stabbing a woman in a Nicosia shop last Thursday.

Abbas Yilmaz is suspected of stabbing a 39-year-old Georgian woman in the back inside the shop where she worked on Ledras Street.

Police urged anyone with information on the suspect’s whereabouts to contact their nearest police station or the public hotline 1460.

Technocrats had warned the previous government as early as 2008 to rein in expenditure but the cabinet and parliament would nonetheless approve inflated budgets, a finance ministry official told an inquiry today.

“It was obvious that the economy was overheating especially in the real estate and construction sectors,” said Stavros Michael, head of the finance ministry’s state budget department.

Despite the warnings in view of the anticipated drop in revenues, by the time the budget went to parliament, state expenditure grew, Michael said.

 “Economic theory states that if you have high, unusual revenues, you must not also increase spending. You must use that to pay back debt and leave spending alone to allow the economy to return to normality,” Michael said.

The ministry technocrat also charged that the Demetris Christofias administration failed to take timely action to address deteriorating state finances. 

HIS first priority will be to strengthen the administrative mechanism and the hierarchy in the Bank of Cyprus (BoC) and to cut costs, interim CEO Christos Sorotos said yesterday.

“From today, we are starting to implement what is implemented in other parts of the world in similar cases, without delay, analyses, and too much talk,” Sorotos told reporters after meeting the Central Bank governor.

Sorotos was appointed interim CEO on Tuesday.

He has experience in corporate restructurings and has previously worked as a deputy governor at National Bank of Greece, country corporate officer for Citibank in Greece and general manager at Eurobank Greece.

Sorotos said he did not believe in the excuse that a bank has a particular status.

“All banks in all parts of the world have one way of operation. They care about their shareholders and have an excellent relation with the regulator,” he said.

Sorotos said his first priority would be to strengthen the bank’s administrative mechanism and hierarchy but also to reduce all administrative costs “today not tomorrow.”

Bank of Cyprus was placed in administration in March, as losses were imposed on uninsured bank deposits exceeding €100,000 to recapitalise the lender, heavily exposed to a Greek government debt write-down.

Depositors were forced to take losses to recapitalise the bank as a condition for Cyprus to receive €10 billion in aid from the International Monetary Fund and the EU.

Some 37.5 per cent of deposits not covered by the deposit guarantee scheme have already been converted into equity. 

An additional 22.5 per cent is being held as a buffer for potential conversion depending on the outcome of an independent asset valuation due by July.

Interim Bank of Cyprus CEO Christos Sorotos after meeting the Central Bank chief yesterday (Christos Theodorides)

THE cabinet decided yesterday to investigate the suspicious sale of Turkish Cypriot land under the previous administration’s watch, a case that has sparked a row with the opposition.

The land, in Dromolaxia, Larnaca, was sold to a Greek Cypriot, and after the coefficients were upgraded, it was sold to the telecommunications authority (CyTA) pension fund in 2011 for around €22 million.

Interior Minister Socratis Hasikos said the procedure was done at the “speed of light,” suggesting that the whole process had been improper.

And CyTA chose the plot over an adjacent one that was cheaper -- by around €4.0 million -- bigger, with all the necessary permits and building coefficients.

“All these will be the object of the investigating committee,” Hasikos said after the cabinet meeting yesterday.

Former interior minister Neoklis Sylikiotis accused Hasikos of lying and warned that he could file a lawsuit against him.

Sylikotis said the case had been examined by the House Watchdog Committee, which found nothing wrong, challenging Hasikos to make the file public.

“The case was closed by the Watchdog Committee,” Sylikotis said. “We are talking about libel and slander and I am already looking into the matter with my legal adviser.”

Hasikos said he had nothing personal with Sylikotis and “it is Mr. Sylikiotis’ right” to start legal procedures if he thought he had been slandered.

“It is the previous administration that is under scrutiny. Mr. Sylikiotis was a member of the cabinet and the cabinet makes decisions based on the information submitted by the minister in charge,” Hasikos said.

CyTA chairman Stathis Kittis also denied any wrongdoing. He too claimed that parliament had finished examining the case.

“We have no problem and we do not feel fear or guilt. It was an investment like all others.” Kittis said. “The price was very good under the circumstances.”

However, ruling DISY MP Giorgos Georgiou, chairman of the committee, said the investigation was far from over. He also charged that CyTA has so far failed to respond to at least three letters seeking information since last June.

“To date, we have not received any response,” he said. “This issue will be tabled before the Watchdog Committee.”

TECHNOCRATS had warned the previous government as early as 2008 to rein in expenditure but the cabinet and parliament would nonetheless approve inflated budgets, a finance ministry official told an inquiry yesterday. 

“It was obvious that the economy was overheating especially in the real estate and construction sectors,” said Stavros Michael, head of the finance ministry’s state budget department. 

He was testifying yesterday at an ongoing committee of inquiry looking into the country’s near-financial collapse. 

Despite the warnings in view of the anticipated drop in revenues, by the time the budget went to parliament, state expenditure grew, Michael said.

“Economic theory states that if you have high, unusual revenues, you must not also increase spending. You must use them to pay back debt and leave spending alone to allow the economy to return to normality,” Michael said. 

He said that in 2008 when they could see that the state’s increased revenues were temporary “based on conditions that could not be upheld” finance ministry technocrats recommended to their political supervisors to only allow up to 3.0 per cent increase in regular spending as a proportion of GDP and 5.0 per cent increase in spending for development. Instead, parliament approved a 6.1 per cent increase in regular spending and an increase of 26.8 per cent in spending for development.  Successive suggestions were similarly ignored by Cabinet each year, including one advising zero rises in state expenses in 2010. 

In 2008, the Demetris Christofias’ government inherited a budget surplus of 3.5 per cent of the gross domestic product (GDP) but closed the year on a 0.9 per cent surplus. The state started running on a 6.1 per cent deficit in 2009, dropping to 5.3 per cent in the following year before jumping to 6.3 per cent in 2011 and 2012. 

Public debt grew from 48.9 per cent of GDP in 2008 to 85.8 per cent in 2012, Michael said. The debt jumped to 58.5 per cent in 2009, 61.2 per cent in 2010 and 71.1 per cent the following year. 

Meanwhile, the economy was slowing down, after years of overheating.

“In economics, the magic word is ‘trend’. It is not just about figures,” Michael said. 

The finance ministry was expecting the property bubble to burst leading to smaller or negative growth, he said. “Those indicators have an immediate impact to state revenues that grow with development and contract with less growth. Spending must be adjusted accordingly.” 

But the ministry technocrat charged that the Christofias administration failed to take timely action to address deteriorating state finances.

 “My view is that measures were taken with significant delays. They should have been taken much sooner,” Michael said. By early 2010, a series of suggestions “with all necessary measures” were lodged to remedy the situation but despite plenty of discussion no action was taken until more than a year later, Michael said. 

By 2011, when measures were first taken to address fiscal imbalances, Cyprus was effectively excluded from borrowing from international markets, due to successive downgrades by credit rating agencies.

  “The lack of trust and impression there was something wrong with Cyprus did not help push the economy forward. But if the state cannot borrow abroad it has to look to the domestic market, taking away funding from the private sector. This causes a chain reaction.” 

Michael said that the only available option to the government at that moment was seeking EU support, and not leave it until a year later in June 2012. 

“In finances, time is very important,” he said. 

Stavros Michael, head of the finance ministry's state budget department yesterday (Christos Theodorides)